The Government of India has approved revisions to the foreign investment framework introduced through Press Note 3 (2020 Series) issued by the Department for Promotion of Industry and Internal Trade (DPIIT).

Press Note 3, introduced in April 2020, requires prior government approval for investments into India where the investor or beneficial owner is situated in, or is a citizen of, a country sharing a land border with India.

There has long been press speculation that Press Note 3 would be overhauled either in full or part. Recent policy changes appear aimed at streamlining the approval process and clarifying certain aspects of the regime, while retaining oversight over investments with potential national security implications.

1.KEY CHANGES 

1.1 Clarification on beneficial ownership – Much needed clarity has finally been provided on how beneficial ownership is assessed, which has been a key structuring issue for global private equity and venture capital funds. This will now be consistent with the definition of beneficial ownership under the Prevention of Money Laundering Rules, 2005. Market practice had been to follow the “Significant Beneficial Owner” test under the Companies Act, 2013. The press release states that one of the aims of these changes is to unlock greater FDI inflows from global funds for startups and deep techs.

1.2 Automatic route for some investments – No approval will be needed if the beneficial interest in the investing entity is held by an entity, resident or citizen of a country sharing a land border with India is less than 10% with no control, subject to other sectoral caps, entry conditions and reporting requirements. 

1.3 Time-bound approval process – If approval is required it will be decided upon within 60 days in certain sectors, namely, the manufacturing of capital goods, electronic capital goods, electronic components, polysilicon and ingot wafers, provided the majority shareholding and control of the investee entity will be held by resident Indian citizens or entities. The press release specifically mentions that the changes are to help companies enter into collaborations and joint ventures to expand manufacturing in India, access technologies and integrate with global supply chains.

2.KEY IMPLICATIONS 

2.1 Reduced uncertainty – Clarity regarding the calculation of beneficial ownership has been sought since the regime was implemented in 2020. The change will provide greater certainty to investors, particularly funds, in assessing whether government approval is required and helps the ease of doing business in India. At the same time, it is possible that existing structures will need to be looked at again to ensure compliance with the amended regulations.

Potential revival of delayed transactions – A more predictable and relaxed approval framework may facilitate investments that were previously delayed or reconsidered due to regulatory uncertainty.

2.2  These changes have been mentioned in a press release and represent the first step of a welcome and long-awaited clarification and relaxation in the strict regime for FDI approval that was put in place at the time of the pandemic in 2020.

TT&A will continue to monitor formal amendments to the FDI Policy and the FEMA (Non-Debt Instruments) Rules that implement these changes.

Feroz Dubash, Sachin Mehta, Amrita Patnaik, Dushyant Bagga & Pratika Shankar – Partners

Disclaimer: This alert only highlights key issues and is not intended to be comprehensive. The contents of this alert do not constitute any opinion or determination on, or certification in respect of, the application of Indian law by Talwar Thakore & Associates (“TT&A”). No part of this alert should be considered an advertisement or solicitation of TT&A’s professional services.